So, Scrooge was right after all

It's a little-known fact that the first economic rationalist was Ebenezer Scrooge. That's because economists simply can't understand why people would do something as stupid as giving presents at Christmas.

Conventional economics teaches that gift giving is irrational. The satisfaction or "utility" a person derives from consumption is determined by their personal preferences. But no one understands your preferences as well as you do.

So when I give up $50 worth of utility to buy a present for you, the chances are high that you'll value it at less than $50. If so, there's been a mutual loss of utility. The transaction has been inefficient and "welfare reducing", thus making it irrational. As an economist would put it, "unless a gift that costs the giver p dollars exactly matches the way in which the recipient would have spent the p dollars, the gift is suboptimal".

This astonishing intellectual breakthrough was first formulated in 1993 by Joel Waldfogel, an economics professor now at the University of Pennsylvania, in his seminal paper, The Deadweight Loss of Christmas.

The difference between what givers pay for presents and the value the recipients put on those presents is the loss being referred to and, since it's equivalent to tearing up banknotes, economists call it a "deadweight" loss.

It follows from this insight that, if people must persist with gift giving, they should at least minimise the loss by giving money rather than items in kind.

Trouble is, were families to assemble on Christmas morning for an equal exchange of $50 cheques, the pointlessness of the exercise would quickly become apparent.

But I must tell you that, since I first wrote about The Problem of Presents, research has continued apace - just in case there's some factor the economists have overlooked.

Typically, their main approach has been to search for some hidden consideration that makes the seeming irrational rational after all.

One possibility is that gifts may procure a source of insurance for the giver. Parents, for instance, may give gifts to their children in the hope the children will care for them in their old age. Adult children may give gifts to their elderly parents in the hope of being remembered at that last great gift giving with lawyers present. Then, money will do fine.

Another line of inquiry is that gifts, particularly inefficient ones, serve as costly signals of the giver's intention to invest in a future relationship. Or maybe gifts are exchanged to break down mistrust, permit co-operation and build relationships.

But such a model doesn't explain why people continue to give gifts in well-established relationships where there is little mistrust and dumb signalling isn't necessary.

The guru Waldfogel has recently refined his calculations on Christmas's deadweight cost, using a new survey to estimate that, per dollar spent, people value their own purchases 18 per cent more than they value items they receive as gifts. (Being a rigorous scientist, the prof has carefully excluded any allowance for the "sentimental value" of gifts.)

Waldfogel's case is bolstered by the news that, according to a US survey conducted by American Express, 28 per cent of respondents admitted to engaging in "gift recycling".

In the course of their inquiries, researchers have discovered that women are much more involved in gift giving than men. Their surveys suggest that women give Christmas gifts to more people than men (on average, 12.5 versus eight), start shopping for gifts earlier than men, devote more time to selecting the appropriate gift (2.4 hours per recipient versus 2.1 hours) and are more successful in finding a desirable gift (10 per cent of women's gifts were returned to the shop versus 16 per cent of men's).

Researchers have also stumbled on the revelation that the practice of shouting rounds of drinks arises from the pursuit of scale economies. It saves time and effort for one person to buy five drinks rather than for five people to buy their own.

Most of this enlightenment comes from a paper by Bradley Ruffle and Todd Kaplan, Here's something you never asked for, didn't know existed and can't easily obtain: A search model of gift giving.

That snappy title is a plug for their theory, which says gift giving makes sense in cases where the giver's knowledge of where to find something the recipient wants is greater than the recipient's own knowledge. Or if the giver is in a position to get it cheaper.

So the rule is that the giver gives a gift only when her "search costs" for the gift are lower than those of the recipient.

This emphasis on the hassle involved in finding suitable presents helps explain why, even though it's regarded as poor form to give money, parents are more likely to resort to money as their children get older. The parents' search costs rise as they become less certain what their kids would like, whereas the kids' search costs fall as they become more independent. This theory also helps explain why people who go on trips return with presents. Their gifts tend to be things that are dearer or harder to find at home. Even so, it's hard to believe the theory accounts for more than a fraction of gifts.

No, I prefer the theory that, because of the discipline many people impose on themselves to ensure they stay within their budgets and make ends meet, many of us have trouble allowing ourselves to indulge in the odd luxury purchase.

So we're pleased when friends and rellos brighten our lives by giving us little luxuries - from chocolates to perfume to jewellery - and when Christmas and birthdays give us a licence to spoil the kids.

I should tell you Ruffle has opined that the utility from gifts consists of not only the monetary cost and value of the gift, but also the emotions associated with it. He contended that "gift giving improves welfare if the giver's pride and the receiver's surprise from the gift plus the receiver's monetary valuation of the gift exceed the giver's monetary cost".

Predictably, however, the economics profession has shown little enthusiasm for this airy-fairy speculation and Ruffle himself seems to have abandoned it.

Really, it makes you wonder how someone so foolish manages to hold down his job.